I would like to tell you about a little known ruling from the ATO. It's unfortunate that not many people know about it, because lots of people are missing out on a big opportunity.
This ruling particularly affects people aged 55-59 who are above average income earners and fall into one of these categories:
These people would often be advised to wait until they turn 60 in order to commence a pension. The rationale for this advice is that any income stream payments they receive before age 60 will be taxed at their marginal tax rate less 15%. So if they are on the top marginal rate (currently 49% including Medicare) then they will pay tax of 34% on their pension income. This tax will exceed the tax saved by their SMSF should they start a pension. Effectively the common belief is that trustees have to make a choice between paying tax on investment income in the SMSF (by remaining in accumulation), or paying tax on the pension income (by commencing a pension).
Determination SMSFD 2013/2 states that lump sum withdrawals from a pension account (which are generally tax free up to a lifetime limit of $185,000) count towards minimum pension income. So if your client has an account based pension then they can satisfy the minimum pension requirements by making lump sum withdrawals. Some important points to consider:
So now some informed trustees can have their cake and eat it too!
NOTE: THIS STRATEGY IS NO LONGER VIABLE AND THE PRESERVATION AGE HAS INCREASED SINCE THIS ARTICLE WAS WRITTEN.
Greg Einfeld has over 20 years’ experience in the Australian Superannuation and Financial Services industry. He has MEc and MBA degrees, is a licensed financial adviser, a qualified actuary, and specialises in Self Managed Super Funds (SMSF’s). He regularly presents on a variety of SMSF topics including investment, tax, estate planning, pensions, administration and strategies.